City agrees to pay $3,168,488 to Kohl’s

More than $3 million in city tax money will be paid to Kohl's for building a department store here, the Rolla City Council decided Monday night.

R.D. Hohenfeldt | Staff Writer

More than $3 million in city tax money will be paid to Kohl's for building a department store here, the Rolla City Council decided Monday night.

The payment, possibly over 20 years, will come from the tax increment financing plan as outlined in the redevelopment agreement the council approved on Nov. 1, 2010.

According to that plan, half of the sales tax proceeds collected by Kohl's, as well as all of its annual real estate tax, will be paid back to Kohl's to cover the land purchase and development cost for the department store near the junction of Highway 63 and Interstate 44 on land the Rolla City Council declared "blighted" in 2010.

The city agreed to help Kohl's pay for the cost of the development on the blighted land. The city does not have the money, so it in effect borrowed from Kohl's and will repay that obligation over the next 20 years, plus 6 percent interest.

City Administrator John Butz opened the discussion Monday night by noting the agreement between Kohl's and the city obligated the city to pay up to $3.3 million for an estimated $7.695 million total project cost.

The agreement required Kohl's to provide the city with "itemized invoices, receipts or other information that will demonstrate that the cost has been incurred."

Butz said the city must verify that any costs qualify for reimbursement.

"That wasn't so difficult," Butz said. "The land and site development exceed $3.3 million."

Butz reported, "The land acquisition and site development and site work costs total $3,416,691, which satisfies the obligations for reimbursement."

But there's another factor to consider.

"What makes this one a little more complicated," Butz said, is the provision in the redevelopment plan that the city would qualify for a reduction in the reimbursement for 50 cents of every dollar the company came in under the budget it formulated for the total project.

"(The) city waived the building permit fee (estimated at $16,000) in an exchange for an opportunity to incentivize Kohl's for cost savings in the total project cost," Butz said.

Kohl's came up with a total project cost of $7,695,000 after removing the original developer who had estimated the cost at $8,564,500, Butz said.

By Dec. 1, 2012, Kohl's had turned in documents for approximately 90 percent of total development costs of $7,431,976.

"In summary, the Kohl's project has come under budget by $263,024," Butz reported to the council. Half of that is $131,512.

Subtract that amount from $3,300,000 to arrive at the $3,168,488 the council approved as the final reimbursable figure.

"It was worth giving up the permit fees," Butz noted.

Now, he said, the city is required to pay that amount plus 6 percent interest "until the obligation is retired."

He further explained to the council that the redevelopment plan allows the city to hire an auditor to assist in the verification of the total project cost, perhaps finding it is even lower than what Kohl's claims, allowing the city to further lower its reimbursement obligation.

Butz said he was able to verify the "hard costs" of land purchase and development, but not the "soft costs" of items such as freight, certain labor costs and various legal charges.

The cost of hiring an auditor would be paid for out of the Special Allocation Fund (a fund which holds the 50 percent sales tax increment and 100 percent of the real property tax increment).

Butz said he had talked to the auditors who recently completed the city audit; they told him that such an audit would require a trip to Kohl's headquarters to track down the costs.

He estimated it could cost $10,000-$12,000 to validate all the invoices that he couldn't, the so-called "soft costs."

Butz also said he had talked to other communities that have used tax increment financing. He found that none of them had ever hired an outside firm to check into the costs claimed by the company.

Councilman Louis Magdits at first indicated a need to have a third-party look into Kohl's claims, saying that "a clever accountant" could easily hide costs that shouldn't qualify for reimbursement.

But Magdits, after Butz clarified that he had verified the "hard costs" and that the total project had indeed come in under budget, changed his mind.

"I'm OK with not having the audit," Magdits said.

Councilman Tony Bahr immediately entered a motion to sign the cortication of reimbursable redevelopment project costs that passed unanimously. Councilmen William Lindgren Jr. and Kelly Long were absent.

The council also voted for the record to set the reimbursable amount at $3,168,488, plus 6 percent interest.

Kohl's ranked 135 on the Fortune 500 list of top American businesses in 2010.

Kohl's is the fourth largest department store by amount of sales.

City councilmen at the time of the adoption of the redevelopment plan noted that it was an important move to bring jobs to Rolla and to kick-start development.